How the Ksh100k Interest-Free Lipa Na Mpesa Loan Will Work

The digital lending market is expected to undergo a major landscape shift after the Central Bank of Kenya (CBK) approved an interest-free loan product to be accessed through Safaricom’s Lipa na MPesa. 

The Faraja loan will allow consumers to shop at select stores, access the goods on credit, and pay for them later without being charged any interest. Users who sign up for this product can purchase goods worth up to a maximum of Ksh100,000.

The new loan product is owned EDOMx Ltd, which is led by Nairobi entrepreneur and Pastor, Julian Kyula. Safaricom and Equity Bank will support the product in two categories. 

Safaricom will provide its Lipa Na M-Pesa platform as the exclusive platform for accessing the Faraja loan product. The telco will benefit through the fees charged on the Lipa na M-Pesa transactions. 

Equity Bank, on the other hand, will provide the finances that will be used to pay the store operators. 

EDOMx Ltd's business model is to get its fees back by getting discounted prices from partner stores. The discounts are expected to be between 7-10 percent. 

From the consumer’s side, the value addition is that they can shop for goods at normal prices without paying for them upfront - and without paying interest on the borrowed amount. 

The consumer will have 30 days to pay back the borrowed amount, making Faraja an important competitor for digital loan lenders and credit cards too.

However, unlike other digital loan products and credit cards, one cannot withdraw their Faraja limit in cash or send it to friends. It can only be used to buy goods on credit at pre-selected stores.

In the event of a default, where the money is not paid back in 30 days, Safaricom will have the leeway to suspend or permanently close the defaulter's Faraja account. EDOMx will also outsource the services of a debt collector at the cost of the defaulting customer.

Example of How it Works

For instance, let's say Store A agrees to partner with EDOMx for the Faraja Loan, and is selling a microwave for Ksh10,000. As customer who qualifies for the Faraja Loan, will get the microwave without paying anything upfront. They will pay the Ksh10,000 later with no interest charged within 30 days of purchasing.

Store A will instantly get back the cash for the product, but rather than receive Ksh10,000 for the normal price, it will receive Ksh9,000 - the extra Ksh1,000 being the discount extended to EDOMx. This is if the agreed discount rate is 10%.

The Faraja Loan product will now be launched later this month after getting the required regulatory approvals.

The Faraja Loan product was initially set for launch in July 2022 but the licensing was delayed as the CBK was working with an influx of applications that resulted from the introduction of a new law requiring it to regulate all Digital Credit Providers (DCPs).

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